Exploring The Duty Of Care And Diligence Of Directors In Australian Corporate Law

The Case of Vrisakis v Australian Securities Commission

Question:

Discuss About The Knowledge Experience Well Influencing Power?

In the case of Vrisakis v Australian Securities Commission [1993] 9 WAR 395 the question before the court was to determine whether the director involved in relation to the operations of the company has been able to live up to the expectations which is imposed on the directors while they discharge. When this case had been decided the Corporation Act 2001 (Cth) has not been in enacted therefore statutory duties in relation to which a director must function with respect to an organisation was not applicable. However in this case the duty which the directors needed to comply with and which the court has to analyse was the mirror image of the duty provided in section 180(1) of the act. This duty was in relation to the observance of a degree of due care and diligence while operating on behalf of the company. In this case it had been provided by the court that the direction and management of the organisation consists of making decisions and working upon actions which may bring much promise on one hand however on the same time they are fraught with risk on the other hand. This system is inherent in the life cycle of Commerce and industry. In this case a non executive director was assumed to have significant responsibilities in relation to the operations of the company. This is because he had significant experience in commercial matters along with the specialised knowledge ability and skill which is required to manipulate or influence the company's affairs which have been conducted previously in a way which can be considered as totally inappropriate. The director in this case was expected to take into account or more intense analysis and evaluation in relation to the affairs of the company. In this context Ipp J had held at the director has to be excused from any form of liability as if it is not done it would be discouragement towards the expected entrepreneurship from non executive directors like him.

In addition it has been stated by him that the process of balancing foreseeable risk in relation to harm which may arise against the potential benefits which may have been expected reasonably to arise in relation to the organisation from the conduct of the directors in this case. In addition in this case both Malcolm CJ and Ipp J had agreed upon the fact that Where are non executive director holds considerable knowledge and experience as well as influencing power, while analysing his actions they need to be compared to a standard of an executive director. In addition it has been held by the judge in this case that the statutory duty in relation to diligence and care would be breached in case the director in context have failed to exercise reasonable extent of diligence and care while exercising his power and discharging his obligations towards organisation. In addition this duty exists or is violated even in situation where the organisation has not faced any actual damage and merely in situation where it could have been reasonably foreseen that such actions of the director would on a subject the organisation or its interest to detriment or harm. This can be simplified as the shareholders and the organisation itself along with the creditors of the company where the financial position of the company is not good have to taken into consideration while determining whether the hard was possible or not and whether the duty has been violated or not. It has also been stated by the court in this case that the best interest of the organisation include the best interest of the members in form of members. The judges also held at even when there is no actual damage caused to the organisation the duty of care and diligence maybe breached by the directors of the company.

The Duty of Care and Diligence of Directors in Australian Corporate Law

The judges in this case also provided that the question in relation to the breach of duty of care and diligence can only be addressed properly by referring to the creation of a balance in relation to the possible risk of harm with respect to the potential benefits which could have been expected reasonably to be gained by the company from the actions. In addition the directors of the company have the right to rely upon the judgement, advice and information provided by those officers of the company who have been entrusted to do so without any verification. However the principal has to be considered in the light of the duty to make enquiry when suspicion arises in relation to the mind of a reasonable director.

In this case the Australian security Commission had made an allegation in relation to the non executive director that there was a failure on his part to apply a due degree of care and diligence in relation to his operations towards the organisation. If the situation is referred to the contemporary law it may be stated that the director of the company was allowed to violate the provisions which have been stated in the corporation act through section 180(1). This section provides that while discharging the duties there must be a due degree of care intelligence observed by the directors of the company. This due degree of care and diligence is analysed or determined by the court by employing another reasonable director in the same position of the director against whom the allegation has been made and then find out whether the reasonable director would have taken the same decision as the actual director. If it can be established through this test that the reasonable director in the same situation in that of the actual director would have taken the same decision then the duty of care and diligence have not been breached by the actual director. However in case the reasonable director would not have taken the decision which was taken by the actual director then it will be stated that the actual director has violated the provisions provided in this section.

In the contemporary law which is the Corporation Act governing organisations registered in Australia the penalty for breaching this section by any director of a company is provided under section 1317E of the legislation. Under this section the director may be suspended by the court from managing Corporation in Australia in the future. In addition if this civil penalty provision is violated by any director the court in case of a serious breach has the right to impose a financial penalty on the director as well. Moreover if the director recklessly and knowingly violates the provision provided in section 180 then a criminal proceedings may also be brought against the director under the provisions of section 6.1 of the criminal code.

Statutory Duty in Relation to Diligence and Care

The case involves the application of common law principles of negligence in relation to a duty of care on corporate organization. In this case it had been ruled by the court that the non executive director is to be excused or declared not guilty by the court in the given situation. While providing this decision it was also held by the court that the director have violated the duty which he had towards a company however if he is prosecuted it would discourage other entrepreneurs to involve in decision making which may be in the interest of the organisation in future. The decision of the case consists of both a positive and negative aspect. It was clear to the judges in this case that the director have indulge in actions which are in violation of law. However taking into consideration the future implications of the case the Court held at the directors should not be liable. As done in the case of Australian Securities and Investments Commission v Sino Australia Oil & Gas Ltd - [2014] FCA 565 in situation where the director has violated any duty he should be prosecuted. The decision of the court in this case is also supported by the provisions of section 1318 of the Corporation Act which have been included to forgive the directors in situations where they violet the duty what buy them to the organisation. Thus through this discussion it is clear that this case has a lot of legal significance in relation to the Australian Corporate Law. It not only provides what actually constitutes the breach of the duty of diligence and care in relation to the organisation but also state the situation in which the director may be excused from the liability. The implications of this case on the future of Australian legal system are discussed below.

One of the most significant implications of this case is that the statutory duty in relation to diligence and care would be breached in case the director in context have failed to exercise reasonable extent of diligence and care while exercising his power and discharging his obligations towards organisation. In addition this duty exists or is violated even in situation where the organisation has not faced any actual damage and merely in situation where it could have been reasonably foreseen that such actions of the director would on a subject the organisation or its interest to detriment or harm. This can be simplified as the shareholders and the organisation itself along with the creditors of the company where the financial position of the company is not good have to be taken into consideration while determining whether the hard was possible or not and whether the duty has been violated or not. It has also been stated by the court in this case that the best interest of the organisation include the best interest of the members in form of members. These principles have been applied in the case of ASIC v Cassimatis (No 8) [2016] FCA 1023 where the director was held liable for the breach of statutory duty of diligence and care even where there was no financial loss faced by the organization. The loss of the organization reputation was held enough by the court to come to a conclusion that the duty of diligence and care have been violated.

In this case it had been provided by the court that the direction and management of the organisation consists of making decisions and working upon actions which may bring much promise on one hand however on the same time they are fraught with risk on the other hand. The application of these principles had been done by the court in the case of Re Connective Services Pty Ltd (28 November 2017) [2017] VSC 609  as done by Robson J.

This case set out for the future that the directors  has to be excused from any form of liability as if it is not done it would be discouragement towards the expected entrepreneurship from non-executive directors like him. These principles of the case has been established through section 1318 of the Corporation Act 2001. However excusing a director entirely is situation where a breach of duty has been identified has rarely been done in the legal system.

One more significant ruling which had been provided through this case is that the process of balancing foreseeable risk in relation to harm which may arise against the potential benefits which may have been expected reasonably to arise in relation to the organisation from the conduct of the directors in this case. These provisions have been successfully applied in the case of ASIC v Doyle (2001) 38 ACSR 606; ASIC v Macdonald (No 11) (2009) 256 ALR 199.

Another significant implication of this case is that where are non-executive director holds considerable knowledge and experience as well as influencing power, while analysing his actions they need to be compared to a standard of an executive director. In this case a non-executive director was assumed to have significant responsibilities in relation to the operations of the company. The application of these principles have been done by the court in the case of ASIC v Healey (2011) FCA 717

References

ASIC v Cassimatis (No 8) [2016] FCA 1023

ASIC v Doyle (2001) 38 ACSR 606

ASIC v Healey (2011) FCA 717

ASIC v Macdonald (No 11) (2009) 256 ALR 199.

Corporation Act 2001 (Cth)

Re Connective Services Pty Ltd (28 November 2017) [2017] VSC 609

Vrisakis v Australian Securities Commission [1993] 9 WAR 395